UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [Mark One] [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 27, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to __________ Commission File Number: 01-19826 MOHAWK INDUSTRIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 52-1604305 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) Post Office Box 12069, 160 South Industrial Boulevard, Calhoun, Georgia 30703 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (706) 629-7721 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares outstanding of the issuer's classes of capital stock as of October 20, 1997, the latest practicable date, is as follows: 34,726,256 shares of Common Stock, $.01 par value.
MOHAWK INDUSTRIES, INC. INDEX Page No. ------- Part I. Financial Information: Item 1. Financial Statements Condensed Consolidated Balance Sheets - September 27, 1997 and December 31, 1996 3 Condensed Consolidated Statements of Earnings - Three months ended September 27, 1997 and September 28, 1996 5 Nine months ended September 27, 1997 and September 28, 1996 6 Condensed Consolidated Statements of Cash Flows - Nine months ended September 27, 1997 and September 28, 1996 7 Notes to Condensed Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosure About Market Risks 12 Part II. Other Information 13
PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (In thousands) (Unaudited) September 27, 1997 December 31, 1996 ------------------ ----------------- Current assets: Receivables $253,806 215,594 Inventories 316,344 302,767 Prepaid expenses 7,723 18,298 Deferred income taxes 18,186 18,186 -------- ------- Total current assets 596,059 554,845 -------- ------- Property, plant and equipment, at cost 569,833 529,961 Less accumulated depreciation and amortization 247,402 205,263 -------- ------- Net property, plant and equipment 322,431 324,698 -------- ------- Other assets 74,274 74,806 -------- ------- Total assets $992,764 954,349 ======== ======= See accompanying notes to condensed consolidated financial statements. 3
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED LIABILITIES AND STOCKHOLDERS' EQUITY (In thousands, except per share data) (Unaudited) <TABLE> <CAPTION> September 27, 1997 December 31, 1996 ------------------ ----------------- <S> <C> <C> Current liabilities: Current portion of long-term debt and note payable 21,772 41,832 Accounts payable and accrued expenses 255,220 201,315 -------- -------- Total current liabilities 276,992 243,147 Deferred income taxes 24,136 27,530 Long-term debt 302,916 345,748 Other long-term liabilities 3,774 4,725 -------- -------- Total liabilities 607,818 621,150 -------- -------- Stockholders' equity: Preferred stock, $.01 par value; 60,000 shares authorized; no shares issued - - Common stock, $.01 par value; 75,000 shares authorized; 34,692 and 34,471 shares issued in 1997 and 1996, respectively 347 345 Additional paid-in capital 134,598 131,560 Retained earnings 250,001 201,294 -------- -------- Total stockholders' equity 384,946 333,199 -------- -------- Total liabilities and stockholders' equity $992,764 954,349 ======== ======== </TABLE> See accompanying notes to condensed consolidated financial statements. 4
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share data) (Unaudited) Three Months Ended ------------------------------- September 27, September 28, 1997 1996 ------------- ------------- Net sales $500,818 466,539 Cost of sales 384,338 362,249 -------- ------- Gross profit 116,480 104,290 Selling, general and administrative expenses 74,441 69,792 Carrying value reduction of property, plant and equipment - 1,350 -------- ------- Operating income 42,039 33,148 -------- ------- Other expense: Interest expense 6,689 7,944 Other expense, net 871 746 -------- ------- 7,560 8,690 -------- ------- Earnings before income taxes 34,479 24,458 Income taxes 13,626 9,658 -------- ------- Net earnings $ 20,853 14,800 ======== ======= Earnings per common and common equivalent share $ 0.60 0.43 ======== ======= Weighted average common and common equivalent shares outstanding 34,969 34,823 ======== ======= See accompanying notes to condensed consolidated financial statements. 5
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share data) (Unaudited) <TABLE> <CAPTION> <S> <C> <C> Nine Months Ended ---------------------------------------------- September 27, 1997 September 28, 1996 -------------------- --------------------- Net sales $1,385,234 1,317,884 Cost of sales 1,067,999 1,018,590 ---------- --------- Gross profit 317,235 299,294 Selling, general and administrative expenses 212,928 209,977 Carrying value reduction of property, plant and equipment - 1,350 ---------- --------- Operating income 104,307 87,967 ---------- --------- Other expense: Interest expense 21,543 25,126 Other expense, net 2,256 2,464 ---------- --------- 23,799 27,590 ---------- --------- Earnings before income taxes 80,508 60,377 Income taxes 31,801 23,844 ---------- --------- Net earnings $ 48,707 36,533 ========== ========= Earnings per common and common equivalent share $ 1.40 1.06 ========== ========= Weighted average common and common equivalent shares outstanding 34,877 34,479 ========== ========= </TABLE> See accompanying notes to condensed consolidated financial statements. 6
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) <TABLE> <CAPTION> Nine Months Ended ------------------------------ September 27, September 28, 1997 1996 ------------- ------------- <S> <C> <C> Cash flows from operating activities: Net earnings $ 48,707 36,533 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 45,343 41,375 Provision for doubtful accounts 5,584 8,939 Carrying value reduction of property, plant and equipment - 1,350 Changes in operating assets and liabilities, net of effects of acquisition: Receivables (43,796) (96,364) Inventories (1,604) (28,906) Accounts payable and accrued expenses 63,548 38,871 Other assets and prepaid expenses 10,365 (1,237) Other liabilities (2,489) (112) --------- ------- Net cash provided by operating activities 125,658 449 --------- ------- Cash flows from investing activities: Additions to property, plant and equipment, net (19,594) (28,952) Acquisition (36,000) - --------- ------- Net cash used in investing activities (55,594) (28,952) --------- ------- Cash flows from financing activities: Net change in revolving line of credit (42,973) 26,536 Payment of note payable (21,200) - Payments on term loans (14,623) (8,040) Proceeds from new loan 9,350 - Proceeds from IRBs and other, net of payments 6,554 - Change in outstanding checks in excess of cash (10,212) 1,576 Common stock transactions 3,040 8,431 --------- ------- Net cash provided by (used in) financing activities (70,064) 28,503 --------- ------- Net change in cash - - Cash, beginning of year - - --------- ------- Cash, end of period $ - - ========= ======= Net cash paid during the period for: Interest $ 22,968 25,417 ========= ======= Income taxes $ 32,228 18,187 ========= ======= </TABLE> See accompanying notes to condensed consolidated financial statements. 7
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands) (Unaudited) 1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the financial statements and notes thereto included in the Company's 1996 Annual Report filed on Form 10-K, as filed with the Securities and Exchange Commission, which includes consolidated financial statements for the fiscal year ended December 31, 1996. The Company's earnings per share are computed by dividing net earnings by the weighted average common and common equivalent shares outstanding. Dilutive common stock options are included in the earnings per share calculation using the treasury stock method. During the nine months ended September 28, 1996, the Company recorded a direct increase in stockholders' equity of $7,158 as a result of the tax benefit from the exercise of stock options that were granted primarily in 1988 and 1989 in connection with the Company's 1988 leveraged buyout. Certain prior period financial statement balances have been reclassified to conform with the current period's presentation. 2. Receivables <TABLE> <CAPTION> <C> <S> <C> <C> Receivables are as follows: September 27, 1997 December 31, 1996 ------------------ ----------------- Customers, trade $ 289,689 247,485 Other 1,055 2,095 --------- ------- 290,744 249,580 Less allowance for discounts, returns, claims and doubtful accounts 36,938 33,986 --------- ------- Net receivables $ 253,806 215,594 ========= ======= 3. Inventories The components of inventories are as follows: September 27, 1997 December 31, 1996 ------------------ ----------------- Finished goods $ 165,386 150,890 Work in process 52,025 45,485 Raw materials 98,933 106,392 --------- ------- Total inventories $ 316,344 302,767 ========= ======= 8 </TABLE>
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (In thousands) (Unaudited) <TABLE> <CAPTION> <C> <S> <C> <C> 4. Other assets Other assets are as follows: September 27, December 31, 1997 1996 ------------- ------------ Goodwill, net of accumulated amortization of $6,705 and $5,589, respectively $ 52,563 53,679 Other assets 21,711 21,127 -------- ------- Total other assets $ 74,274 74,806 ======== ======= 5. Accounts payable and accrued expenses Accounts payable and accrued expenses are as follows: September 27, December 31, 1997 1996 ------------- ------------ Outstanding checks in excess of cash $ 21,588 31,800 Accounts payable, trade 133,195 86,527 Accrued expenses 62,930 49,628 Accrued compensation 37,507 33,360 -------- ------- Total accounts payable and accrued expenses $255,220 201,315 ======== ======= </TABLE> 6. Credit agreement On April 15, 1997, the Company amended and restated its credit agreement to provide for an interest rate of either (i) LIBOR plus 0.2% to 0.5%, depending upon the Company's performance measured against certain financial ratios, or (ii) the prime rate less 1.0%. Additionally, the termination date of the credit agreement was extended to May 15, 2002. 7. Acquisition On July 23, 1997, the Company acquired certain assets of Diamond Rug & Carpet Mills, Inc. and other assets owned by Diamond's principal shareholders for approximately $36,000 which consisted of $19,600 in cash, at closing, $7,000 in cash over the six-month period following closing and a $9,350 note payable in seven annual installments of principal plus interest at 6%. The acquisition was accomplished through a plan of reorganization filed by Diamond under Chapter 11 of the United States Bankruptcy Code. 8. Nonrecurring costs In the third quarter of 1996, the Company recorded a charge of $1,350 arising from a revision in the estimate of fair value of certain land, buildings and equipment based on current market conditions related to mill closings that occurred in 1995. The after-tax effect of the charge for the three months and nine months ended September 28, 1996 was $817, or $0.02 per share. 9
MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (In thousands) (Unaudited) 9. Effect of accounting pronouncement not yet adopted The Financial Accounting Standards Board issued FAS No. 128, Earnings per Share, which will supersede APB No. 15, Earnings per Share. This statement, which the Company is required to adopt in the fourth quarter of 1997, requires companies to replace the presentation of primary EPS and fully diluted EPS with basic EPS and diluted EPS. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the company. The Company does not believe the implementation of FAS No.128 will have a material effect on the Company's consolidated financial statements. 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Quarter Ended September 27, 1997 As Compared With Quarter Ended September 28, - ----------------------------------------------------------------------------- 1996 - ---- Net sales for the quarter ended September 27, 1997 were $500.8 million, which represented an increase of 7% from the $466.5 million reported for the third quarter of 1996. The third quarter 1997 net sales comparison to the third quarter of 1996 was favorably affected by incremental sales from the acquisition of certain assets of Diamond Rug & Carpet Mills, Inc. Additionally, the sales increase was partially attributable to a gain in market share which the Company believes resulted from continued strong support of our independent dealer base and strong overall acceptance of Mohawk products. Gross profit for the third quarter of the current year was $116.5 million (23.3% of net sales). In the third quarter of 1996, gross profit was $104.3 million (22.4% of net sales). The stronger gross profit percentage in 1997 is the result of manufacturing improvements from restructuring and improved product mix. Selling, general and administrative expenses for the current quarter were $74.4 million (14.9% of net sales) compared to $69.8 million (15.0% of net sales) for the prior year's third period. Interest expense for the current period was $6.7 million compared to $7.9 million in the third quarter of 1996. The primary factor for the decrease was a reduction in debt levels in the third quarter of 1997 as compared to the third quarter of 1996. In the current period, income tax expense was $13.6 million, compared to $9.7 million in the third quarter of 1996, or 39.5% of earnings before income taxes for both periods. Nine Months Ended September 27, 1997 As Compared With Nine Months Ended - ----------------------------------------------------------------------- September 28, 1996 - ------------------ Net sales for the first nine months ended September 27, 1997 were $1,385.2 million, which represented an increase of 5% from the $1,317.9 million reported for the first nine months of 1996. This sales increase resulted from incremental sales from the acquisition of certain assets of Diamond Rug & Carpet Mills, Inc., a gain in market share which the Company believes resulted from continued strong support of our independent dealer base and strong overall acceptance of Mohawk products. Gross profit for the first nine months of the current year was $317.2 million (22.9% of net sales). In the first nine months of 1996, gross profit was $299.3 million (22.7% of net sales). Selling, general and administrative expenses for the current period were $212.9 million (15.4% of net sales) compared to $210.0 million (15.9% of net sales) for the prior year's first nine months. The percentage decrease was primarily due to lower sample and bad debt expense in the first nine months of 1997. Interest expense for the current period was $21.5 million compared to $25.1 million in the first nine months of 1996. The primary factor for the decrease was a reduction in debt levels in the first nine months of 1997 as compared to the first nine months of 1996. In the current period, income tax expense was $31.8 million, compared to $23.8 million in the first nine months of 1996, or 39.5% of earnings before income taxes for both periods. LIQUIDITY AND CAPITAL RESOURCES The Company's primary capital requirements are for working capital, capital expenditures and acquisitions. The Company's capital needs are met through a combination of internally-generated funds, bank credit lines and credit terms from suppliers. The level of accounts receivable increased from $215.6 million at the beginning of 1997 to $253.8 million at September 27, 1997. The $38.2 million increase resulted primarily from seasonally higher sales volume in the third quarter as compared to December. Inventories rose from $302.8 million at the beginning of 1997 to $316.3 million at September 27, 1997, due to requirements to meet seasonal customer demand. 11
Capital expenditures, including the purchase of certain property, plant and equipment from Diamond Rug & Carpet Mills, Inc., totaled $55.6 million in the first nine months of 1997 and were incurred primarily to modernize and expand manufacturing facilities and equipment. The Company's capital projects are primarily focused on increasing capacity, improving productivity and reducing costs. Capital spending for the remainder of 1997 is expected to range from $10.0 million to $15.0 million, the majority of which will be used to increase capacity and productivity. On April 15, 1997, the Company amended and restated its credit agreement to provide for an interest rate of either (i) LIBOR plus 0.2% to 0.5%, depending upon the Company's performance measured against certain financial ratios, or (ii) the prime rate less 1.0%. Additionally, the termination date of the credit agreement was extended to May 15, 2002. On July 23, 1997, the Company acquired certain assets of Diamond Rug & Carpet Mills, Inc. and other assets owned by Diamond's principal shareholders for approximately $36.0 million which consisted of $19.6 million in cash, at closing, $7.0 million in cash over the six-month period following closing and a $9.4 million note payable in seven annual installments of principal plus interest at 6%. The acquisition was accomplished through a plan of reorganization filed by Diamond under Chapter 11 of the United States Bankruptcy Code and was financed primarily through existing credit facilities. IMPACT OF INFLATION Inflation affects the Company's manufacturing costs and operating expenses. The carpet industry has experienced moderate inflation in the prices of certain raw materials and outside processing for the last three years. The Company has generally passed along nylon fiber cost increases to its customers. SEASONALITY The carpet business is seasonal, with the Company's second, third and fourth quarters typically producing higher net sales and operating income. By comparison, results for the first quarter tend to be the weakest. This seasonality is primarily attributable to consumer residential spending patterns and higher installation levels during the spring and summer months. EFFECT OF ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED The Financial Accounting Standards Board issued FAS No. 128, Earnings Per Share, which will supersede APB No. 15, Earnings Per Share. This statement, which the Company is required to adopt in the fourth quarter of 1997, requires companies to replace the presentation of primary EPS and fully diluted EPS with basic EPS and diluted EPS. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the company. The Company does not believe the implementation of FAS No. 128 will have a material effect on the Company's consolidated financial statements. FORWARD-LOOKING INFORMATION Certain of the matters discussed in the preceding pages, including but not limited to, the assumptions regarding the Company's ability to continue to successfully integrate the acquired Diamond assets may constitute "forward- looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements involve a number of risks and uncertainties. Factors that may cause actual results to differ materially include, but are not limited to, the following: market conditions in the carpet industry, raw material prices, timing and level of capital expenditures, the successful integration of acquisitions, the successful introduction of new products and other risks identified from time to time in the Company's SEC reports and public announcements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS Not applicable. 12
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is involved in routine litigation from time to time in the regular course of its business. Except as noted below, there are no material legal proceedings pending or known to be threatened against the Company or any of its property. In June 1994, the Company and several other carpet manufacturers received subpoenas to produce documents from a grand jury of the United States District Court in Atlanta. The subpoenas were requested by the Antitrust Division of the U. S. Department of Justice in connection with an investigation of the industry. The Company believes that the results of this investigation will not have a material adverse impact on the financial condition of the Company. In December 1995, the Company and four other carpet manufacturers were added as defendants in a purported class action lawsuit, In re Carpet Antitrust Litigation, pending in the United States District Court for the Northern District of Georgia, Rome Division. The amended complaint alleges price fixing regarding polypropylene products in violation of Section One of the Sherman Act. In September 1997, the Court determined that the plaintiffs met their burden of establishing the requirements for class certification and granted the plaintiffs' motion to certify the class. The Company is a party to two consolidated lawsuits captioned Gaehwiler v. Sunrise Carpet Industries, Inc. et. al. and Patco Enterprises, Inc. v. Sunrise Carpet Industries, Inc. et. al.; both of which were filed in the Superior Court of the State of California, City and County of San Francisco in early 1996. Both complaints were brought on behalf of a purported class of indirect purchasers of carpet in the State of California and seek damages for alleged violations of California antitrust and unfair competition laws. The Company believes both of these lawsuits are without merit and intends to vigorously defend against them. The complaints filed do not specify any amount of damages but do request for any unlawful conduct to be enjoined and treble damages plus reimbursement for fees and costs. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS NO. DESCRIPTION - ------- ------------------------------------------------------------------ 11 Statement re: Computation of Per Share Earnings 27 Financial Data Schedule (B) REPORTS ON FORM 8-K None. 13
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MOHAWK INDUSTRIES, INC. Dated: October 22, 1997 By: /s/ David L. Kolb -------------------------------------- DAVID L. KOLB, Chairman of the Board and Chief Executive Officer (principal executive officer) Dated: October 22, 1997 By: /s/ John D. Swift -------------------------------------- JOHN D. SWIFT, Chief Financial Officer, Vice President-Finance and Assistant Secretary (principal financial and accounting officer) 14
EXHIBIT INDEX NO. DESCRIPTION - --- -------------------------------------------------------------- 11 Statement re: Computation of Per Share Earnings 27 Financial Data Schedule 15